9.17 Inventory Model Mathematics Problem
This has been another optimization problem. We have derived the following formula in Chapter 9.16, “Economic Ordering Quantity (EOQ) Model Inventory Optimal Order Quantities Model” :
Q* = [(2 F S) ÷ (C P)] 0.5
Example:
(S) Projected annual unit sales = 10,000
(C) Total carrying cost per unit of inventory = 25%
(P) Unit inventory purchase price = $5
(F) Fixed order costs = $500
Solution:
| Q* | = [(2 × $500 × 10,000) ÷ (0.25 × $5)] 1/2 |
| = [$10,000,000 ¸ $1.25] 1/2 | |
| ≈ 2,828 units |
Question: Every how many days will the firm have to re-order inventory?
Answer: (10,000) ÷ (2,828) ~ 3.5 times a year – or about every 102 days